Peak oil review - October 24

1. Oil and the Global Economy For another week the global oil markets were largely driven by the prospects for settling the EU¡'s sovereign debt crisis. The price rise which began in early October, taking Brent crude from $98 a barrel to the neighborhood of $112, continued through Wednesday when it became clear that negotiations between France and Germany over the debt crisis were at an impasse. Prices then fell with Brent closing out the week at $109.56 and NY oil at $87.40.

Although limited amounts of oil are now being exported from Libya, global markets remain tight, which is why OPEC is still averaging $108 a barrel for its oil. The death of Gadhafi last week brought to a close another chapter in the Arab uprising. The next few months will see whether the Libyans can form a government with enough strength to organize and provide security for oil production or whether disagreements among the various tribes, cities, and other factions will prevent Libyan oil exports from reaching significant levels in the next year or so. Some engineers are already talking about the damage that might have been done to the pressure of Libyan oil fields by the emergency shutdowns they underwent.

US commercial petroleum inventories fell by an unusually large 11 million barrels the week before last adding more credence to the IEA assertion that the world currently is burning more oil and other liquids than it is producing. Global stocks are still about 2.6 billion barrels so the drawdown can still go on for some time without much effect. Global oil prices have been trading over a $15 a barrel range centered on $110 since late spring. This price range is some $25 dollar a barrel higher than where oil traded for most of 2010 and is clearly exacting a toll on many economies.

The announcement that US combat forces will not be remaining in Iraq after the end of the year raises once again the question of whether the government will be able to provide sufficient security to allow major increases in oil production. Assassinations, bombings, and sabotage of oil facilities still take place on a regular basis. Increasing tensions in the region stemming from the Syrian, Bahraini, Yemeni, and Kurdish uprisings, and the numerous issues between Iran and many other states, all suggest that exploiting the world's last major deposit of cheap and easy to extract oil may not be all that easy.

A meeting of oil ministers in Paris last week provided the venue for a number of interesting assertions by senior officials of the IEA. The Agency believes that: the growth in oil demand would be "largely wiped out" by a double-dip recession; that the ongoing unrest in the Middle East might lead to underinvestment in oil production and higher prices in the year ahead; it is almost too late to limit global temperature increases to 2 degrees C.; the world is faced with a dire future in which the average global temperatures rise by more than 3.5 C unless there are major innovations to lower the cost of clean energy and lower carbon emissions; and that they see less potential for an oil price spike in the next few months than they did a few months ago due to slowing economies.

2. The EU debt crisis Most observers agree that a quick settlement to the EU's sovereign debt crisis is vital to continued global economic stability. Unless a way is found to heal permanently the hemorrhaging of Greece's economy, the problem will spread to the major European banks that hold the Greek debt and from there to Spain, Italy, Belgium and eventually France. Even Wall Street is threatened due to the massive credit default swaps it holds on Europe's debt. Taken to the extreme, the situation could ultimately result in severe damage to the global banking system and a major world-wide depression. In such a situation the significance of peaking global oil supplies likely would be lost in the midst of plummeting demand for oil.

Europe's leaders clearly understand the danger of the situation and are scrambling to find a solution that is not easily coming. Greece's economy seems to be in a death spiral with its people unwilling to make the sacrifices demanded by the rest of the EU and its deficits continuing to grow. A split has developed between Germany and France which are the only Eurozone countries large enough to affect a bailout. France, whose banks are heavily invested in Greece and other threatened Eurozone economies and would be damaged, if not wiped out, by widespread defaults, is seeking to solve the problem with European and global money rather than using its government credit to support French banks.

Germany has already committed $290 billion to a bailout fund for Greece, Portugal, and Ireland, and its voters are tired of bailing out what they see as bad financial management by other Eurozone members. Berlin, under pressure from the parliament, is refusing to bail out what it considers to be poor loans made by banks in other counties. The search for a solution jumps around from large write downs in the bad debts to various schemes to inflate European Financial Stability Facility (EFSF). So far all proposals have serious problems and serious opposition which is why the problem continues to be pushed ahead despite the urgency of the situation.

Despite constant incantations of optimism from various European leaders, which serve to push up the equity markets and the price of oil, many observers believe the debt situation has become so massive and complex that it is insoluble on more than a temporary basis. While some agreement may be cobbled together in the next week or two, it seems likely the underlying problem will around is some form or other for many years.

3. US oil consumption As the world's largest consumer of oil products, just what is happening to oil consumption in the United States is always of interest. A new study says US drivers will spend about $490 billion filling their gas tanks this year which will be up by more than $100 billion over 2010. Three years ago when average gasoline prices got over $4 a gallon, demand for gasoline fell by only 3 percent. These high gasoline prices have become a part of life and not just a brief up and down as in 2008. Despite oil prices that have been running 60-80 cents a gallon higher than last year, gasoline consumption is only down some 1.3 percent last month from September 2010.

It seems that most drivers can't or won't reduce their fuel consumption and are taking the extra $100 billion from other purchases. Many say they are cutting back on food expenditures as they have few other options. America seems to be running into an "elasticity wall" at which lifestyles and lack of alternative transportation choices are keeping Americans in their cars right down to the end of their resources.

The API is reporting that total US petroleum imports fell by nearly 10 percent in September reflecting a 5 percent increase in domestic production during the last four weeks over last year as well as the continuing drawdown in US stocks which were 5.3 percent lower than a year earlier. It is possible that the general tightness of the global market without Libyan production and various reductions in non-OPEC production is making it more difficult for US refiners to find crude to import.

The API is also reporting a surge in the demand for distillates in September which recently has been running nearly 6 percent higher than last year. As it is difficult to see an increase of this size being consumed by a moribund US economy, it is likely that much of the increased demand for distillates is being exported. US oil product exports this year are up 24 percent over 2010. With global conventional oil production flat, much of the increase in demand is being satisfied by natural gas liquids and ethanol which are not substitutes for distillates.

If current trends continue, it is likely that we are going to see increasingly higher prices for distillates – diesel, fuel oil, and jet fuels – and that the availability of these oil products may become an issue before that of gasoline.

4. Fracking for gas There was news on the fracking front last week as new rules were issued to control fracking of natural gas shale. As shale gas has come to be seen in many quarters as the salvation for the nation's problems by providing clean cheap energy, jobs, and tax revenues, the new rules are likely to become controversial as the industry seeks to have them overturned.

The EPA announced that it will issue national shale wastewater rules under the Clean Water Act that will set standards that drillers must meet before sending water that has been extracted from fracked wells to waste water facilities for treatment. It currently is illegal to discharge untreated waste water from fracking into streams or bodies of water. This move is separate from an ongoing study of the effects of fracking on drinking water. The new rules are to come into force in 2014.

While New York's temporary ban on drilling ended last week, the new rules issued with the lifting of the ban will prove to be onerous for many drilling companies unless they are modified. The new rules, which are expected to come into force next year, establish buffer zones around waterways and aquifers that are as much as 20 times wider than those found in fracking-friendly Pennsylvania. The rules would prohibit drilling within 500 feet of the state's 18 primary aquifers, within 4000 feet of the NY City and Syracuse watersheds and within 2000 feet of rivers and streams. NY City is also proposing that drilling be banned within seven miles of the aged underground aqueducts that bring water to major cities.

Numerous drilling companies already hold leases on tens of thousands of acres that would be closed under the new rules. After a 90-day comment period, the new regulations could be finalized and new drilling permits could be issued by mid-2012.

Quote of the week"Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune." -- James D. Hamilton

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

California regulators have approved North America's first cap-and-trade program, setting limits on carbon emissions. The move represents the world's second-largest carbon control program after the European Union. (10/22, #14)

U.S. officials have approved the first offshore oil-exploration plan submitted by BP since the Deepwater Horizon oil spill. (10/22, #17)

Increasingly, Iraq's drive to expand its oil and natural gas industry, the country's economic lifeline, is becoming dependent on the government's ability to ensure security and, without US forces that looks to be a serious problem. (10/21, #8)

Lukoil and its partners are poised to award a numerous contracts to international engineering and construction companies as it moves full speed ahead with development of its supergiant West Qurna Phase 2 in southern Iraq. (10/21, #9)

ExxonMobil, BP, and Eni will spend around $100 billion to upgrade three oil fields in southern Iraq. About $50 billion would be spent to upgrade the big West Qurna Phase 1 oil field which is being developed by Exxon. The remaining $50 billion will be spent by BP and Eni to upgrade the Rumaila and Zubair oil fields, respectively. (10/20, #7)

Iraq has agreed with oil majors to build a multi-billion-dollar oil field water injection plant in the south of the country, after disagreement over costs that suspended the project for months. (10/20, #8)

Iraq is driving to build new oil refineries to increase capacity by 740,000 b/d as its postwar economy swells, part of a multibillion-dollar program under way across the Persian Gulf region. (10/20, #9)

Iraq's crude oil production is expected to hit some 3 million b/d by the end of October from the current 2.9 million--the highest level reached since the US-led invasion in 2003. (10/18, #7)

President Chavez of Venezuela declared on Thursday that he had beaten cancer, less than five months after revealing that he had undergone emergency surgery to remove a tumor while in seclusion in Cuba. (10/21. #11)

Statoil announced its giant North Sea discovery Aldous Major South is estimated to contain double the volume compared with previous estimates. (10/21, #14)

A Japanese industrial company aims to test a new tidal power system at an energy center in the north of Scotland. (10/21, #20)

India and Russia signed deals to work closer with the IEA on energy matters. The International Energy Agency sponsored a meeting in Paris that focuses on energy security and sustainability, as well as closer engagement with non-member states. (10/20, #5)

Eni has made a very large natural-gas discovery off the coast of Mozambique, big enough that it could turn the East African country into a major exporter of gas to Asia. (10/20, #11)

China's largest rare earths producer is suspending production for a month in a move to force prices up. (10/18, #17) (10/20, #13)

The Gas Exporting Countries Forum won't become a cartel like OPEC because it won't impose production quotas on its members, said Russia's Deputy Energy Minister Anatoly Yanovsky. (10/19, 6)

Russian Prime Minister Putin has told his Japanese counterpart Yoshihiko Noda that Moscow hopes to advance energy cooperation with Tokyo in areas including LNG and possible electricity supplies to the gas- and power- hungry nation. (10/17, #16)

Japan is considering revising plans to cut carbon dioxide emissions by 25 percent by 2020 due to a rethink of its energy future. The country is worried that it is spending too much on carbon credit programs. (10/19, #12)

The EU is for the first time clearly questioning whether it should press ahead with long-term plans to cut greenhouse-gas emissions if other countries don't follow suit. This could herald a significant policy shift for a region that has been at the forefront of advocating action to combat climate change. (10/19, #17)

A bill passed by the US Senate ensures the American public isn't in danger of gas pipelines "exploding under their feet," a California lawmaker said. (10/19, #14)

US officials are trying to make sure the American coastline will be protected as Cuba begins drilling a deep water oil well later this year about 60 miles off the Florida Keys. (10/17, #8)

China's hydropower output dropped 24.5 percent year-on-year to 56.87 billion kilowatt-hours (kwh) in September as a result of decreased runoff from major rivers. (10/17, #9)

BP reached a $4 billion out-of-court settlement with Anadarko Petroleum Corp. to settle claims related to the deadly explosion and oil spill at a U.S. offshore drilling platform. (10/17, #13)

Kinder Morgan Inc.'s agreement to buy El Paso Corp. (EP) for $21.1 billion, the energy industry's biggest transaction in more than a year, would create the largest natural-gas pipeline network in the U.S. (10/17, #15)

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the daily …

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